AHL, a hedge fund that at its height held assets of $28bn and contributed the majority of performance fees at Man Group, is struggling to regain momentum and find the right structure for the large number of hires it made.

AHL struggles to regain momentum

The company, one of the pioneers of trading with complex computer algorithms, suffered a 16.9% loss in 2009 and has seen patchy performance since. Early on in the financial crisis, AHL took advantage of the downturn to pick up staff from rivals and investment banks. But the more than three-fold increase in its total headcount in the past six years, to 142, has presented the management team with challenges.

Now it is tweaking its style, slowing down the speed of trading and increasing accountability across teams in the hope of restoring its fortunes. Despite a good long-term record, the company is still 10 percentage points off its high-water mark, or the level at which it can charge performance fees, according to Morgan Stanley. In the 12 months to June 30, AHL’s assets under management fell from $23.9bn to $16.7bn, through poor performance and redemptions.

The fund was one of the first to employ a computer-driven investment strategy and became the poster child for managed futures, spawning a generation of imitators. Its bread and butter is momentum trading, which uses complex computer algorithms to capture trends in global markets. Trend-followers, as they are known, buy markets that are going up and sell those that are going down but since 2009 markets have not favoured this strategy. Intervention by governments and regulators has increased volatility and resulted in a paucity of clear trends.

The management team, headed by chief executive Tim Wong, has been working on those challenges, changing details, rather than the big picture, in a strategy he hopes will add up to more than the sum of its parts. Wong likens his business to that of a car designer: “We aren’t adding a fifth wheel to the car but collectively our tweaks aim to turn it from a Fiat into a Ferrari.”

AHL’s history is inextricably linked with that of parent company Man Group. In 1989, the commodities brokerage ED&F Man Investment Products (as it was then) decided to buy a little-known computer-driven investment business. The gradual acquisition of AHL was completed in 1994.

From 2000, Man Group focused exclusively on financial services, and enjoyed rapid growth until 2008. In the two years leading up to the peak, on March 31, 2008, Man Group’s assets under management grew by around 50% to $74.6bn, according to company results.

As Man Group grew, it began to try and diversify away from AHL to find capacity for the huge inflows it was attracting. It bought fund-of-funds business Glenwood in 2000 and RMF in 2002, and two years later seeded Bayswater Asset Management, a global macro manager. At one point seen as the next AHL, Bayswater was attractive because it was thought to have lots of capacity and low correlation to AHL. But it was shut down in August 2008, following poor performance.

Despite these attempts at diversification, AHL continued to drive Man Group’s profits. In the five years to the end of March 2007, it averaged gains of 11.6 % a year. It represented a third of Man Group’s assets but was responsible for three quarters of its performance fees.

AHL also wanted to come up with new models beyond its core trend-following strategy and consequently increased the staff numbers.

The number of people working in research, trading and operations went from fewer than a dozen in 2002 to 142 in 2011. The sharpest increase came in the early days of the crisis when headcount nearly doubled between 2007 and 2009.

This rapid expansion naturally altered the dynamic within AHL, according to former employees. One said: “AHL grew in terms of personnel very quickly, without any plans for growth or how it would affect existing personnel.”

Another said that “AHL entered a quant arms race with Winton”. Winton Capital Management is the rival trend-following firm set up by AHL co-founder David Harding in 1997, which also has a big research team.

In 2007, Man Group partnered up with the University of Oxford to launch the Oxford-Man Institute of Quantitative Finance (OMI), based in Oxford and funded solely by Man Group.

One former employee described it as “a luxury, not a necessity – the genius of it was marketing”, while another said: “After a certain point, every additional PhD will detract value. Everyone is trying to show that they’re needed. Managing PhDs can be like herding cats.”

Wong said: “Expanding the team has provided us with management challenges. A lot of them are technically strong but have had a few years at investment banks, which differs from the buyside. You have to train them up. I wouldn’t say that it has been plain sailing.”

• Collegiate set-up?

The fast growth was followed by departures of several senior and junior employees in recent years. In 2010, Andy Hutton, the long-standing head of trading, retired. Senior departures this year have included Darren Upton, head of research methodology; Richard Martin, head of quantitative credit strategies; Jeremy Large, a research economist; and Jeremy Taylor, a senior quantitative analyst. Recently AHL has also made some senior hires. Douglas Greenig joined as chief risk officer, and Ravi Chari joined as co-head of foreign exchange trading.

Wong said that some people fit in with AHL’s culture better than others. He believes that AHL’s turnover, especially on the research side, is lower than the industry average. He added: “We classify leavers as regrettable or non-regrettable; the number of regrettable ones has been very small.”

Managed futures strategies come into their own when the markets are dominated by strong trends. In 2008, AHL gained 33.2% as equity markets plummeted. However, in 2009, AHL suffered its first annual loss, dropping 16.9%. That year the average managed futures fund was down 1.72%, according to data provider Hedge Fund Research. AHL was wrong-footed by government interventions in the market such as quantitative easing, which distorted investor behaviour and increased correlations between asset classes.

It has a strong long-term track record, and AHL Diversified, the flagship fund, posted average annual gains of 12.6 % with 17.2 % volatility between March 1, 1997 and June 30, 2012. However, in the three years to June 30, it has made average yearly gains of 1.4%. Last week, Man Group’s share price was 87.7% off its October 2007 peak.

Morgan Stanley analysts estimated in early 2010 that AHL was still about 16% off its high-water mark. In the summer of that year, AHL’s management restructured the organisation of the team. It decided to split the team into sectors – commodities, currencies, equities, fixed income and volatility – following conversations with external consultant Bain Consulting.

Wong said that the move was driven by a desire to increase accountability, given that the number of markets the firm traded had increased from around 50 to over 300.

But some within the firm felt that it encouraged internal strife. One former employee said: “Teams were in competition to provide something of value. People became competitive, secretive and political.”

He added: “Sector performance became the key thing to determine remuneration, incentivising sectors to exaggerate their own importance and undermine the others.”

Wong said that staff bonuses are decided first and foremost on AHL’s overall performance. How individual sectors have performed, in relative and absolute terms, are of secondary importance. He added that while management worried that splitting out sectors would create silos, “this doesn’t happen at AHL; we have a very collegiate set-up”.

• Tweaking the models

Wong explained that rather than diversifying away from its momentum strategy, much of the research effort at AHL in recent years has been in coming up with non-momentum models that can complement the firm’s core approach and help it navigate the difficult trading environment that has been characterised by so-called “risk-on, risk-off” behaviour.

Wong said: “Momentum strategies still account for over 80% of the portfolio but non-momentum strategies are an important overlay to diversify the return streams.” Non-momentum trades might include relative value or global tactical asset allocation.

He said that AHL is also looking at a wider range of different assets and non-G10 markets. At any one time, the firm has about 40 different research projects on the go. AHL will test model portfolios with internal capital adding external money bit by bit.

A key tweak to the way AHL runs money has been to slow down the speed of trading systems. Wong said that while in 2008 AHL outperformed because it traded faster, “since 2009, trading faster hasn’t added any value and has cost us relative performance versus our competitors”.

In March 2011, AHL and its peers suffered big trading losses, following the Japanese tsunami. In response, AHL launched operations Blue Tit and Pigeon. The focus of these projects was to refit AHL’s models. They changed the allocation of the models and slowed down trading. Sources claim these projects were conducted “hastily and without the usual level of collective oversight”. Man Group refutes these claims. Wong said: “The faster trading model has been losing efficacy, especially in more liquid markets. I think it may be because of the rise of high-frequency trading but we don’t have enough data to prove that.”

Far from proving a distraction, Wong believes the increase in research headcount, OMI and the new structure are helping AHL get the details right again.

He said: “Over time the research projects have added value. The most successful players succeed at the margin. It’s not about discovering a magic bullet. Research is not just about new trading models. It’s also about better risk management, which is always underrated, and cutting trading costs.”